24 November 2008
- Raising the personal allowance to £12,000 would take 7 million low-paid workers out of the income tax net altogether. People earning the minimum wage or less would pay no income tax at all.
- It would make the average UK household £100 per month better off, reversing substantial falls in household disposable income over the last 12 months.
- This tax cut would put almost £19bn per year back in people's pockets, allowing considerable additional spending and investment in the productive, private sector economy. This is the key to overcoming recession and restoring economic growth.
The Adam Smith Institute (ASI) has today called on Alistair Darling to substantially raise the personal income tax allowance in today's pre-budget report. Author Tom Clougherty advocates a personal allowance of £12,000 – which is roughly equivalent to the minimum wage, or half the average wage.
As well as stimulating the economy by giving people more disposable income to spend and invest, raising the personal allowance to £12,000 would strengthen incentives to work, help to eliminate the 'benefits trap' and make low-paid jobs more economic – greatly increasing opportunities for the unemployed.
If the higher rate threshold were kept at its current level, rather than raised in line with the personal allowance, this policy would cost the Exchequer just £18.9bn in lost revenue.
The authors argue that such a sum could easily be offset by cutting government waste, and urge against further government borrowing, noting that the taxpayer already spends more than £30bn a year servicing government debt:
In the face of a recession, every business and household in the country is looking to find economies and make savings. There is no reason why government, with an annual budget in excess of £600bn, should be any different.
Tom Clougherty, the ASI's policy director, added:
Tax cuts are not a silver bullet, but there they are the most powerful, pro-growth policy tool that the government has available to them. The government is right to want to cut taxes: they should start by putting more money back in people's pockets, and this means radically increasing the personal allowance.
The full briefing paper can be downloaded for free at <http://www.adamsmith.org/images/pdf/personal-allowance-briefing.pdf>
Notes for Editors
- The Adam Smith Institute is the UK's leading proponent of free-market economic and social policies. The Institute is politically independent and non-profit.
- The £100 per month better off figure assumes a single-earner household. Dual-earner households would in fact show greater savings from the reform, due to the availability of two increased personal allowances.
- According to ASDA's monthly income tracker, disposable incomes were 9.6 percent lower in September 2008 than they had been 12 months earlier.
- It would cost an additional £6bn to raise the higher rate threshold in line with the personal allowance – taking the total cost of this reform to £25bn.
- Tax calculations were performed by Richard Teather, a Fellow of the Adam Smith Institute and an Associate Senior Lecturer in Taxation at Bournemouth University.
WHY ALISTAIR DARLING SHOULD RAISE THE PERSONAL ALLOWANCE is published by the Adam Smith Institute, 23 Great Smith Street, London SW1P 3BL.